Fraud Vulnerabilities and the Global Financial Crisis
Levi, Michael, Smith, Russell G, Trends & Issues in Crime and Criminal Justice
You only find out who is swimming naked when the tide goes out (Buffett 2001: np).
This paper examines the evidence on what is likely to happen to the incidence of different types of fraud in the context of the Global Financial Crisis (GFC), whether as a result of that crisis or because of other factors that coincided with it. Normally, statistical trends enable determination of whether a problem is getting better or worse. However, despite new mechanisms developed to improve fraud statistics in Australia, these cannot be applied retrospectively to past data (especially since the last serious recession was almost 2 decades ago and the last comparable GFC was in the 1930s); and fairly comprehensive Australian cost of fraud data are currently available only for one year and therefore cannot be used to show trends in the cost of fraud (Smith 1997; see also Smith & Budd 2010). In the United Kingdom, the National Fraud Authority (NFA 2010b) has begun to collect cost of fraud data from year to year as a follow up to the report to the Association of Chief Police Officers that provided an estimate of the cost of fraud in the United Kingdom in 2005 of £13.9b (Levi et al. 2007). However, longer term cost data are currently available in the United Kingdom only for payment card frauds (FFA UK 2010), some aspects of identity frauds (CIFAS 2009) and for some frauds against government departments (NFA 2010a). Except for consumer fraud data in North America and consultancy reports of variable quality (Levi & Burrows 2008), fraud data elsewhere in the world are too poor and/or intermittent to provide an adequate basis for knowing whether fraud is rising or if more of the ?dark figure' of undetected fraud has been discovered. Even useful periodic trend reports, such as KPMG's (2011a) Fraud Barometer Reports mix together high-value frauds that actually occurred at a range of different periods because there are different elapsed times from occurrence to court.
Australia was one of the countries in the OECD least affected by the GFC during 2008-09, with the harmonised unemployment rate rising just 1.3 percentage points to 5.6 percent (ABS 2010), compared with 2.2 percent for OECD countries as a whole. Before examining the implications of the GFC on fraud, what the general financial crime-relevant effects might be expected to be will be examined.
One plain effect (and cause) of the GFC is uncertainty and high volatility in economic markets (Vaitilingam 2009). Even organisations with access to credit postpone making investment and hiring decisions (Bloom 2009) and since many of Australia's markets are international, this affects the rate of economic growth.
In the early stages of the global recession, some commentators suggested that it might be a ?middle-class' or ?white-collar' recession, unlike anything seen in the past. Because the recession started in the financial sector overseas (which also saw the first mass lay-offs), it was argued that highly educated workers would suffer more than their semi-skilled and manufacturing counterparts. This was expected by some to make disaffected white-collar workers more likely to commit fraud.
Research indicates that these predictions about white-collar job losses are incorrect as they apply to the United Kingdom (Muriel & Sibieta 2009). Low-skilled ?elementary' occupations have suffered most since 2008, followed by skilled trades and sales. By contrast, managers and senior officials have seen unemployment at their level increase by only one percent and ?white-collar' professional unemployment increase by just 0.7 percent; about one-sixth of the increase in the other groups. In Australia, similar trends were present, with employment of professionals declining by 0.6 percent in the 12 months to February 2009, with employment of labourers declining by 1.7 percent during this period. The employment of managers actually increased by 0.8 percent and community and personal service workers by 6. …